Has the World Bank Seen the Light in India’s Energy Financing?

Powerlines in Mumbai, capital city of the Indian state Maharashtra. Source: World Bank Photo Collection’s flickr photostream, used under a creative commons license.

The World Bank has been one of the foremost advocates for a state-centered approach to India’s power sector challenges. But the bank’s own lending to the Indian energy sector in fact lags overall lending when it comes to direct interface with states. The World Bank and India are currently preparing a new partnership strategy for 2018-22; this strategy should include a frank look at the obstacles that have prevented bank partnership with states in the energy sector —especially low-income states — and a strategy for overcoming them.

The World Bank’s 2017 Snapshot of its investments in India does not mince words stating, “The major remaining obstacles to making India’s power sector responsive to the demands of consumers and a modernizing economy are at the state level.” A World Bank-sponsored study of India’s power sector draws the same conclusions: key work to improve the sector “has to be carried forward by the states, facilitated by the central government.” And the World Bank’s 2013-17 Country Partnership Strategy for India also lays out a states-centered approach, with a particular emphasis on lower-income states.

The bank’s recent lending towards the energy sector does not reflect this insight, however. In the period 2013-2017 the World Bank and the International Finance Corporation (IFC) approved $4.44 billion in loans to India’s energy sector. Only a quarter of this total, or $1.12 billion, went to projects with a state as the primary partner. Projects with the private sector as the implementing partner received $585 million, while the center and centrally-owned public sectors enterprises received $2.74 billion. And only one of the four state-focused projects, the North Eastern Region Power System Improvement Project ($470 million in World Bank financing), partners with low-income states. The other three projects partner with Andhra Pradesh and Haryana, two of India’s most economically dynamic states. On the plus side, however, the World Bank’s strategy seems to be shifting over time; three of the state-focused projects were awarded since 2015, including a disaster recovery program for Andhra Pradesh with $80 million for grid hardening.

Working with India’s states rather than the central government certainly presents challenges. State governments may have less capacity to spend money and implement projects, for instance. But it iss certainly possible, and the feasibility of partnering with states is shown by the bank’s record of lending in other sectors. Just over 41 percent of all funding for non-energy projects ($9.2 billion) goes directly to the states. An additional 11 percent ($2.5 billion) goes to projects where central and state-level agencies both act as implementing partners. The bank’s non-energy projects in India are more diverse in terms of location as well; it has partnered directly with 22 states.

The Asian Development Bank’s (ADB) energy program in India also suggests that state-focused energy lending is feasible. Between 2013 and 2017 the ADB approved $3.2 billion in lending to India’s energy sector, or 34 total investments. State agencies received $1.1 billion in loans — a third of the total. Perhaps more importantly, only 11 of these projects featured central agencies as implementing partners. The private sector received 8 investments, while state agencies were the implementing partners for the remaining 15. The ADB partnered with eight different states in this period. Some of these loans were very small, as little as $225,000 for a technical assistance program; these are unlikely to have a transformational effect on a state’s power sector, but they allow the ADB to build relationships at the state level and lay the groundwork for larger loans.

The center will continue to be an important partner in multilateral development assistance. Although the Modi administration recently announced that states would be allowed to deal directly with lenders when borrowing for certain large infrastructure projects, but only a small minority of projects are covered by the new policy. The center will generally continue to act as a guarantor of most loans and will be involved in negotiations. But hopefully the 2018-2022 partnership strategy will see a renewed commitment by the World Bank and the Government of India to routing lending directly to the states.